November 2007

Good and Bad of Online Payday Lending

Many people find themselves in need of cash in a crisis. Knowing both the good and bad about payday loans can help you make an informed decision.

The CFA and FTC have both expressed serious concerns about "predatory lenders" and "legal loan sharking". Both agencies have called payday loans too expensive, too easy to attain, and questioned whether these loans can contribute to debt among poor Americans. Many Americans find themselves unable to repay their payday loans, thus accumulating even more debt as the fees pile up.

Payday loans are very expensive, and many borrowers may not realize how very expensive they are in relation to other types of loans, including credit card cash advances. While lenders should offer not only the lending fee information, but also a calculation of the annual percentage rate or APR as required by the Truth in Lending Act, many do not. If you do not have a good understanding of loan terms, you may believe that a $20 per $100 loan fee is equal to a 20% APR; however, this is not true. A credit card may charge a 20% APR, or $20 per year on $100 borrowed on the credit card. The $20 per $100 borrowed fee at a payday lender is charged every two weeks, making the annual percentage rate 26 times that of the credit card. Payday loans typically have an APR ranging from 250% to 650%, thus making debt particularly hard to overcome. Needless to say, that $100 loan can quickly become very expensive, particularly if you cannot pay it off when due in two weeks.

Why, when faced with these negatives, would people choose payday loans? Most people opt for a payday loan in a time of financial crisis. A bill is due, the car needs repaired, or perhaps there has been a medical emergency. Payday loans are easy to get, can allow you to have the funds immediately, and if you have bad credit, may be your only option in an emergency.

Payday loans are not intended as a long term financial solution. Most lenders limit the total amount loaned to between $1,500 and $2,500 and the average loan is between $200 and $500. Smaller loans are, not surprisingly, easier to manage for consumers. If a consumer avoids taking out loans that they cannot afford to repay, and repays all payday loans when they are due, they can typically avoid incurring substantial debt.

Consumers with bad credit may have no other alternatives when they need some additional cash. Payday loans can be a good option for these Americans, and can provide them with needed funds. If your choices are taking out a payday loan or bouncing checks, the payday loan, if paid back promptly, will be far less expensive. Bounced check fees can accumulate quickly, and bounced checks will damage your credit.

Payday loans come with many drawbacks, and should be used only if critically needed. These loans are expensive, and borrowers should be aware of all their options, and consider whether they have a credit card cash advance available, can borrow from family, or can make do without the funds. Choose a reputable payday lender who offers not only their lending fees, but also information about the annual percentage rate for the payday loan. Be certain that you have a plan in place to repay your payday loan in a timely fashion.